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Bay Area Apartment Rents Slower Increase

The San Francisco Business Times published an article this week about the slowing growth of Bay Area apartment rents. According to the article apartment rents in San Francisco grew by 9.9% in 2012. Apartment rents in the East Bay increased by 6.9%. A leading apartment advisor predicts that growth will be 3.2% in San Francisco and 3.3% in the East Bay.

Home Ownership and Supply

I believe two factors are contributing to the slow down in rental growth. First, we have seen the residential real estate market take off and a lot of buyers have gotten off the sidelines and are buying homes. This means that a lot of renters are moving to be homeowners. Second, a number of new rental projects are being constructed. Both of these items are increasing the supply and causing rental rates to slow.

Bay Area Apartment Owners

Existing apartment owners have benefited from the increased rents (the exception may be in rent-controlled areas like San Francisco, Oakland, & Berkeley). Cash flow is up and sales of apartments are at record low cap rates.

What does the tapering of rent growth and the increase in interest rates mean? Well, it probably means that the market is reaching the peak of the value cycle. Interest rate increases mean that buyers will have to pay less for properties to cover rising financing costs.

If you have questions about your apartment complex, please give me a call at (925) 385-8798.

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Apartment Demand

Bisnow (Denver) posted an article stating that from 2011 to 2012 apartment prices of properties with 100 units or less rose almost 34%. They attribute demand to low vacancy and rising rents.

“The Denver market has exploded,” Greg (here with his partner Kyle Malnati) told us during a chat this week. From 2001 to 2011, the average price per apartment unit in Denver climbed from $61k to $70k, a healthy rise. In 2012? The average price skyrocketed to $94k (specifically apartment buildings of 100 units or fewer). What’s driving it: a perfect storm of investor demand, low vacancies, rising rents, and an overall lack of product for sale. (A storm like this means it’s rainin’ cash.) Vacancies haven’t been this low since before the dot-com bust, he says. [Read more…]

It appears from this article that investors with cash are seeing the benefits of commercial real estate. Most industry experts agree that apartments are one of the safest asset classes to use as an inflation hedge. The short duration of their leases allow landlords to adjust rents regularly as property values rise.

What do you think is driving the demand?

As always you can call me to talk about building wealth through real estate at (925) 385-8798.

 

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Commercial Real Estate & Inflation (Part 2)

Apartment Property in Walnut Creek, CA

Recently I wrote a post detailing what inflation was and that a hedge fund manager had recommended commercial real estate as a potential hedge against inflation. I realized that I hadn’t explained why commercial real estate acts as a hedge against inflation and a store of value.

Inflation Erodes Purchasing Power

In the previous post I shared that inflation makes money purchase less goods and services. The downside of this is that it can affect the lifestyle of anyone with a fixed income. A set income of $6,000 per month will by fewer services, fewer goods, and less entertainment as prices rise.

How Commercial Real Estate Can Protect Against Inflation

Commercial real estate investments that adjusts with inflation can work to protect the investor against the effects of inflation through income protection and wealth preservation.

Income Protection

The income from commercial real estate is tied to rent. Rent can be adjusted periodically to keep up with inflation.

Rents tied to short term leases, as in apartment properties, are easily adjusted on a regular basis (yearly) to account for the effects of inflation. Self-storage properties are another type of commercial real estate that generally have short term contracts/leases that can be adjusted as inflation takes effect.

As inflation occurs, rents can be increased to track inflation. The increased income can help the investor to maintain the level of lifestyle that they previously enjoyed.

Wealth Preservation

Commercial real estate also works to preserve wealth because it is a hard asset. The nominal price of a piece of real estate will rise as inflation rises.

If the purchasing power of a dollar is cut in half over a period of time, it stands to reason that twice as many dollars will be needed to buy commercial property over that same time period. In this hypothetical situation, the commercial real estate investor has not lost any of their wealth over the inflationary period, because the market value of his building has risen in step with inflation.

Long Term Fixed-Rate Financing

Investment real estate that is prudently leveraged with long term fixed-rate financing has an even greater potential to protect the investor from inflation.

Long term fixed-rate debt provides the investor with the opportunity to buy a larger property than they have the cash for and to maintain a consistent payment until the loan pays off. A fixed-rate protects the borrower from the risks of inflation affecting interest rates and increasing refinancing risk.

The rental income should cover the debt payments for the life of the loan. Each payment reduces the loan amount and increases the owner’s equity in the property, slowly building wealth over time.

If an investor borrows 50% of the purchase price and inflation cuts the purchasing power of a dollar in half over the life of the loan, it stands to reason that the investor’s investment has increased by four times.

For Example:

  • Purchase Price =$2,000,000
  • Initial Loan = $1,000,000
  • Initial Investment = $1,000,000
  • Market Value (with inflation) = $4,000,000
  • $4,000,000 Market Value/ $1,000,000 Initial Investment = 4x Return On Investment

In Closing…

You can see the benefits that commercial real estate (and investment real estate) offers to protect owners from the effects of inflation. To begin investing in commercial real estate, please feel free to reach out to me at (925) 385-8798.

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Commercial Real Estate & Inflation

Many in the media and financial world are predicting Inflation. Because the Fed is devaluing the U.S. currency, many assume that inflation will come.

Inflation

What is Inflation? I am glad you asked.

Inflation is the gradual or rapid loss of purchasing power. Many of us have seen this at the grocery store or gas pump. When I first started driving, gas only cost $0.99 per gallon. I recently filled up at over $4.00 per gallon. I used to be able to buy a candy bar at the checkout counter with 2 quarters. Today it will likely cost you closer to $1.00.

In both of the examples above one dollar ($1) lost it’s ability to purchase an item. One dollar used to purchase a whole gallon of gasoline, now it only buys 1/4 of a gallon. A dollar used to buy 2 candy bars, now it only buys you one.

Inflation occurs when an abundance of money chases after scarce resources.

Effects of Inflation on Wealth

Inflation can ravage the wealth of an individual. If an individuals portfolio does not grow at a rate faster than inflation, the portfolio is actually losing the ability to buy services, food, and shelter.

In the example above a $1,000,000 portfolio used to buy 2,000,000 candy bars. Now it can only purchase 1,000,000 candy bars. If the rate of inflation remains the same, the same portfolio may only buy 500,000 candy bars in the near future.

Exchange the candy bar for bread, water, electricity, or healthcare and you can see the devastating effects that inflation can have on the wealth of an individual.

Protecting Against Inflation

Kyle Bass is the founder of Hayman Capital, a hedge fund. He made quite the fortune by short selling the sub-prime mortgage market. He spoke to a CNBC reporter after a conference about his thoughts on inflation. A link to the video is below.

In the video Mr. Bass says at the 2:05 minute mark that he expects inflation. At the 2:22 mark he suggests owning productive assets (apartment buildings). At the 2:35 minute mark he also recommends securing long-term fixed rate financing on those assets.

http://video.cnbc.com/gallery/?video=3000143907

If you want to learn more about purchasing hard assets to protect your wealth, please contact Peter at 925.385.8798.

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Real Estate Investment Is a Business

Modern BuildingI was talking with a long-time real estate investor over lunch. He said that he had recently realized that real estate investment is a business.

Many real estate investors think that real estate provides passive income (and it does) and that they can sit on the beach while the checks roll on in. However, they don’t realize that it takes work and a plan to develop that passive income.

Self Employed or a Business

Many people find themselves self-employed. They end up trading their time for dollars. If they don’t work, they don’t get paid. Robert Kiyosaki calls this “Owning a job.”

Business owners leverage the work of other people to convert employees’ time and effort for dollars. Business owners build a system and a team to produce a product or a service. Business owners can go on vacation and have the business run on its own.

Real Estate Business

Owning rental and investment real estate is very similar to a business. You have clients – tenants, a product – housing or rental space, managers – property managers, sales – leases and rent, and profit – cash flow.

Realizing that real estate is a  business helps the investor develop a plan or strategy to reap the greatest reward from the business. How?

Image courtesy of sritangphoto / Freedigitalphotos.netImagine a strip retail owner. If she thinks of her rental space as a product, she can envision who she will sell it to, how she will market to them, and what they are willing to pay. She can also think through objective ways of making her product (space) more attractive to tenants — fresh paint, a new sign, cleaner landscaping.

Correctly thinking about systems and personnel enable an investor to step away from the day-to-day entanglements of real estate. Viewing your real estate investments as individual businesses can help you to improve the profitability of your properties and your personal wealth.

What do you think? How else does real estate correlate to business? Leave a comment below.

Image courtesy of sritangphoto /Freedigitalphotos.net

Company Profile

Welcome to Maclennan Investment Group, Inc., your East Bay Area real estate investment advisors. Maclennan Investment Group assists buyers and sellers of real estate maximize the investment potential of their real estate assets.

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Offering real estate services in the communities of: Walnut Creek, Concord, Pleasant Hill, Martinez, Alamo, Lafayette, and surrounding cities.

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925.385.8798

Maclennan Investment Group, Inc.
3380 Vincent Rd, Ste HUB
Pleasant Hill, CA 94523
p. (925) 385-8798
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